Ran Out of Ammunition...

The Fed ran out of ammunition today as a rate cut down to the critical 1% failed to bring back significant optimism. Stocks ended mixed with the Dow down 74 points.

Why is that so?

There is a few explanations that I can offer. The first one is technical and is the simplest. The few days following a huge surge (yesterday) will definitely be sideways days inclined in the opposite direction (I say that all the time, don't I?). Investors are just too greedy to leave that much profit on the table subjected to more uncertainty. In fact, the historical surge yesterday has already priced in this 50 basis points cut! That is why nothing moves after the Fed cuts for real.
Secondly, with Fed fund rate down to 1%, we all know the Fed has more or less ran out of ammunition. That was the level ex-chairman Alan Greenspan went to in order to pull the economy out of the last recession. If the Fed has ran out of ammunition so early in this looming global recession, what else can they or anyone do when the effects of the global recession starts turning up in the GDP numbers? That question really puts a chill down the spines of every analysts out there, me included.

In fact, bond traders are again staying out of the party by rushing back into short term bonds, depressing short term bond yields (see bond yield curve). I really hate to say this but I maintain my outlook on the final capitulation and that this is not the bottom yet.


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